What is Ijarah?
Ijarah is an Arabic word that means “to give something on rent”.
Under the concept of Ijarah in Islamic banking, a customer can use an asset or equipment, which is owned by an Islamic bank, for a fixed period against a fixed price. Al Ijara is very similar to a leasing contract, and the asset under the Ijarah contract could be a car, home, plant, or a machinery. Financing Concept: Transferring the usufruct of an asset but not its ownership.
- Bank transfers the usufruct to the client for an agreed period at an agreed consideration (rentals)
- The asset under Ijarah should be non-perishable, non-consumable
- Asset which do not maintain their corpus during their use cannot become the subject matter of Ijarah, for instance money, commodities etc
- Types of Ijarah financing:
- Operating Ijarah: standard Ijarah (leasing) agreement
- Ijarah thumma al bai: lease and buyback agreement
- Ijarah-Wal-Iqtina: lease and unilateral undertaking to transfer ownership